Treasury plans crackdown on sales of Sipps

Fears of another pensions mis-selling scandal prompted the Treasury to take avoiding action yesterday.

New rules, which come into effect next April, will mean savers can obtain up to 40pc tax relief on residential property - including holiday homes overseas - bought for self invested personal pensions (Sipps).

As The Daily Telegraph reported on Wednesday, the Treasury is to consult on whether Sipps should be regulated. At present, no authorisation is required to sell Sipps. Norwich Union, Britain's biggest pension provider, warned this week that it was worried about people being wrongly advised to transfer assets into Sipps.

But Charles Suchett-Kaye, a partner at City solicitors Reynolds Porter Chamberlain, warned that regulation may not come quickly enough to stop people being misadvised about Sipps.

The Treasury consultation paper proposes regulating Sipps from April 2007 - or one year after the new rules allowing property into Sipps take effect.

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Mr Suchett-Kaye said: "Sadly, this proposal may be a case of closing the stable door once the horse has bolted. The hype surrounding Sipps means there is a real danger of people making unsuitable investment decisions which they may come to regret.

"This problem is exacerbated by the promotion of products such as wine, antiques and property as ideal for Sipp investment by unqualified sales people who may not understand the needs of the investor."

Greater flexibility than conventional pensions has helped Standard Life attract £1billion into its Sipp since the start of the year.

A Treasury spokesman said: "One of the options in this consultation will be to introduce a new Financial Services Authority-regulated activity of establishing and operating a pension scheme.

"If implemented, this could have the effect of bringing Sipps, and all other non-occupational pension schemes, within the scope of FSA regulation."

Speculation that billions of pounds of pensions funds will flow into the property market was played down by the Treasury, which is sensitive to suggestions that it did not anticipate how the new rules could be exploited.

UCB Home Loans, a subsidiary of Nationwide Building Society, estimates that investment in buy-to-let poperty might increase by between £3billion and £5billion as a result of the rule change. Tax liabilities and legal costs on property held in pensions will offset initial tax relief advantages, experts warn. Ray Milne, managing director of Halifax Financial Services, said: "If property is held within your Sipp, you would have to pay a market rent or face a tax liability on the benefit in kind received.

"Once all the rules are taken into account, the advantages of holding bricks and mortar in your Sipp are by no means clear-cut."

Tom McPhail, of independent financial advisers Hargreaves Lansdown, added: "Frankly, these esoteric investment options are turning out to be a pain in the technicals. The tax treatment is likely to put off all but the most committed of investor. In the majority of cases it appears that the Revenue will assume a non-commercial benefit unless the investor can prove otherwise, and with the tax charge running at 8pc of the value of the investment every year it does not look like fun."

Standard Life added yesterday that it is unlikely to allow foreign property to be held within its Sipp because of additional tax and legal costs overseas.